Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

James M. Gruskin - Assistant VP, Finance and IR

Analysts

Peter Salkowski - Goldman, Sachs & Co.

Matt Chesler - Deutsche Bank

Jaime Neuman - Wachovia

Michael Meltz - JP Morgan

Todd Morgan - Oppenheimer

Ken Silver - Royal Bank of Scotland

Steve Flynn - Morgan Stanley

David C. Swanson

- Chairman and CEO

Steven M. Blondy - EVP and CFO

R.H. Donnelley Corp. (RHD) Q2 FY08 Earnings Call July 30, 2008 10:00 AM ET

Operator

Good morning, ladies and gentlemen. Welcome to the R.H. Donnelley Second Quarter 2008 Results Investor Conference Call. At this time all participants are in a listen-only mode. Later we will conduct a question and answer session and instructions will be given at that time. Please note that today's call is being recorded, as well as broadcast live over the company's website at www.rhd.com.

I would now like to turn the call over to Mr. Jim Gruskin. Mr. Gruskin, you may begin.

James M. Gruskin - Assistant Vice President, Finance and Investor Relations

Thank you and good morning everyone. I am Jim Gruskin, Vice President of Finance at R.H. Donnelley. Hosting the call today are Dave Swanson, Chairman and Chief Executive Officer of R.H. Donnelley; and Steve Blondy, Executive Vice President and Chief Financial Officer.

Certain statements made today may be forward-looking within the meaning of the Private Securities Litigation Reform Act. We call your attention to our press release for the quarter ended June 30th, 2008, and the company's Form 8-K furnished to the SEC this morning, both of which discuss second quarter results. We also encourage you to review the company's other periodic filings with the SEC, which set forth important factors that could cause actual results to differ materially from those contained in or suggested by any forward-looking statements. Copies of R.H. Donnelley's SEC filings may be obtained by contacting R.H. Donnelley, searching its website at rhd.com, or visiting the SEC website at www.sec.gov.

This transmission is the property of R.H. Donnelley Corporation, any retransmission or broadcast without the expressed consent of the company is strictly prohibited.

During today's call we will make references to certain adjusted figures such as EBITDA, free cash flow, and net debt. Certain of these figures exclude costs such as restructuring charges, FAS 123 expense, restrictive stock unit expense related to the Business.com acquisition and goodwill impairment charges.

Some of the items we will be discussing are non-GAAP financial measures, and additional information about non-GAAP financial measures as well as a reconciliation between these items, and the most comparable GAAP measures can be found in the press release and related 8-K furnished to the SEC this morning. The press release is available on our website and can be accessed by going to rhd.com and clicking on Press Releases. Please review the risk factors described in the Safe Harbor language.

Now, I would like to turn the call over to Dave.

David C. Swanson - Chairman and Chief Executive Officer

Thank you, Jim. Good morning everyone, thank you for joining us. Let me start with the headlines for the quarter. First, where there is a will there is a way, and despite a challenging environment in the quarter we were able to deliver strong adjusted EBITDA of $366 million, in line with Q2 last year and once again led our peer group in revenue growth and profitability.

Second, our revenue was in line with the previous year, ad sales which as you know, are a leading indicator for future reported revenue, declined 8.6%. This result, combined with our outlook for the remainder of the year, is causing us to revise our guidance for full-year 2008 ad sales to down 7% to 8% from the previous guidance of down mid-single digits.

Third, our teams across the company are really doing a great job, [inaudible] costs, finding synergies, new areas of efficiency, and getting us to a place with the technology investments and initiatives we've been making in the last few years, and finally beginning to save us money and make us more efficient. We know that, as a result of weak ad sales this year, we have a challenging revenue line next year. They're taking action now to prepare for that and have employed cost functional, employee led teams working in combination with process reengineering consultants to improve productivity and quality in every function of the company, including sales. This is a very large 40 to 60 week initiative involving as many as 80 dedicated employees and consultants. We expect to generate significant savings from the initiative through result and a restructuring charge of approximately $40 million this year.

Fourth, in June, we completed a series of refinancings that significantly reduced mandatory debt prepayments through 2009 and extended our debt maturity schedule. And finally, as a result of all of the above, we were able to reduce net debt by $230 million in the quarter.

And before I hand it over to Steve, let me give you some color on what's going on in the field. As I know most of you follow other local media, I doubt that this will be new news. [inaudible] published ad sales, which is a better reflection of the current environment than reported revenue, were down 8.6% in the second quarter. We're down 6.7% for the first half of the year, it represents about 55% of our full year. And while no one is happy with this result, it reflects one of the most difficult selling environments I have witnessed in my 30 years in the business. The economy, consumer confidence and settlement among most small business owners have worsened in recent months. What started for us this time last year is a regional softness in Florida and Nevada, has grown to include a very broad-based markets and business categories.

Nearly every business metric and economic indicator that we track was weaker in the second quarter than it was in the first, and the results were quite similar across Telco brand, local and national. So, what's driving these trends? I thought it was very well captured in a recent quote by economist, Peter Narichiate [ph] of the University of Maryland, and he said, the small business owners are caught in the scissors between high fuel prices and slow to no growth. This is exactly what we're hearing. Small businesses are facing pressure on their top line as consumers cut back on their spending, and on the bottom line, the price of energy, food and many other inputs raised.

According to the most recent survey from the National Federation of Independent Businesses, expectations for sales growth is at its lowest point since they began tracking monthly data in 1986. Overall economic weakness has also limited the ability of these small businesses to pass a long rising cost to their customers. Let me share one other fact. In Business [ph], small business survey conducted in the second quarter, 45% of the companies cited staying in business as a critical or major concern, up nearly 10 points from a year ago. We're hearing this story played out on sales calls across our footprint. While the vast majority of advertisers are maintaining or increasing their investment with us, they are unable to increase at levels we historically see. We've seen a slight rise in cancellations, two-thirds of which is driven by out of business and advertisers' inability to keep up on their monthly bill. New business sales are also off.

Our revised guidance for ad sales reflects the view that Q3 and Q4 are going to look a lot like Q2. All of our leading indicators and metrics are supporting that view. But while it's… it’s a pretty challenging environment right now, we talk to our customers, salespeople and look beyond the macro numbers, there is plenty to be encouraged about and many signs that our issues are much more cyclical than secular. When we analyze sales by verticals, business categories, we see a reflection of the current economy. Businesses that are prospering in this economy, categories like pawnbrokers, bankruptcy authorities and services, [inaudible], jump dealers, cleaning services, these kind of categories are all spending more money with us. Many of these categories had sales gains of 30% to 60% in the second quarter.

On the foot side of the coin, you have categories that have faced the brunt of this housing led downturn, like residential real estate, mortgage loan providers, building contractors and the like. Many have gone out of business, for those remaining, spending is down because business is down. To put a finer point on that for you, we grouped 19 business categories that are all closely tied to housing and we tracked those results. These categories represented about 1% of our ad base for the quarter. In the second quarter, that group of categories was down 46% compared to Q2 '07. What's different today than we've seen in the past is that there are just more challenged categories than growth categories. As the economy improves, we expect this cycle to reverse, and when it does we are well positioned to resume the improvements in growth we were seeing before the downturn.

Our Triple Play strategy was developed to ensure our advertisers did find ready to buy consumers regardless of whether they are searching in print Yellow Pages, Internet Yellow Pages, major online search engines or the rest of the Internet, and we continue to refine that offering.

Now, if you are a small or medium-sized business, it's important for you to reach out the active shoppers across all of those platforms. Ignoring the print Yellow Pages is as big a mistake as ignoring the Internet, and we are the only ones that can deliver the whole pie in our markets.

Our digital products continue to deliver solid growth and we have a lot of exciting improvements in the development pipeline, we'll be talking about later this year. We know that there will always be demand for solutions that do the best job of helping SMEs grow and deliver the best value. And this is where we are already well positioned today and are making investments to be even better tomorrow.

Our strategy is to increasingly respond to what SMEs want in their advertising, targeted, measurable, easy to buy and affordable. And also, what they want from the companies they buy advertising from, trusted, easy to do business with, and service-oriented. So, seeing beyond the challenges of the current environment I remain confident and excited about the value that our solutions deliver to advertisers and where that's going in coming years, and also the ability of our sales force to communicate that value proposition to the businesses in our markets.

With that, I'll turn it over to Steve.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Thanks, Dave, and good morning, everyone. During the second quarter we made substantial progress on the financial front. Q2 net revenue of $664 million was essentially in line with last year, as higher dealer revenue and lower advertiser revenues offset the challenging ad sales growth.

Q2 costs were down $5 million from Q2 last year and $19 million sequentially, with efficiencies in selling, publishing, manufacturing, and distribution activities overcoming the significant increases in bad debt during the quarter. In addition, Q2 '08 benefited from $5 million of capitalized IT expense associated with the final stages of our systems integration and the timing of some expenses that will occur in the second half. Importantly, we still invested generously in key areas such as DexKnows.com and advertising.

Q2 bad debt expense of $34 million represented 5.2% of revenue, up $5 million sequentially and $15 million from Q2 last year. Nearly half our increase in write-offs from last year delayed the advertiser bankruptcies or disconnects, reflecting the pressures that small businesses currently face. It also demonstrates that those advertisers that stay in power continue to value our solutions. Resulting Q2 EBITDA of $366 million equaled last year's and represented a strong 55% margin.

Turning to interest. We paid $164 million of cash interest in Q2, including $16 million on exchanged RHD Corp. notes that would otherwise have been paid in July. GAAP interest expense was $236 million, including $39 million of non-cash expense from mark-to-market swaps that became ineffective hedges for our new credit facilities.

At June 30th, our average interest rate was 8.4%, up from 7.4% at the end of Q1 due to our refinancings. While this increase is substantial, the silver lining is that spreads in our RHD Inc. bank debt now reflect current market rates. So the future impact of that refinancing won’t be so significant.

Strong Q2 free cash flow of $159 million reflects $20 million of CapEx and $23 million of working capital and other cash uses. [Inaudible] Q2 reflects capitalized IT costs from the final stages of our publishing systems integration that went live this month. This major accomplishment allows us to now operate the entire company on a unified state-of-the-art technology platform effectively completing our Dex integration and synergies program.

Q2 working capital investment primarily reflects the impact of higher AR balances due to slower paying customers and our completed transition from Qwest to in-house billing in that 14 state region.

Turning to capital structure. Net debt at June 30th of $9.7 billion was $230 million lower than last quarter, reflecting strong cash flow and the impact of our debt refinancings. Leverage at June 30th was 6.8 times. Our Q2 refinancings accomplished three important goals as highlighted in the debt maturity slide filed with our earnings release today. First, if we do start mandatory payments over the next six quarters by $740 million to just $140 million; second, it extended the maturity of $1.2 billion in Dex West bank debt until 2014; and third, it eliminated a $170 million of debt via the bond exchange.

We're very pleased with these results, especially given the challenging credit market environment. Our next debt maturities are now two years away with RHD Inc. bank to Dex West bonds coming due in 2010. Both at the opco [ph] level, these borrowers benefit from lower leverage and structural seniority. We expect to be opportunistic as market windows open. And now have an extended runway to work with.

Our continuing strong cash flow generation and extended debt maturities ensure ample liquidity for the foreseeable future. Our entire $365 million of revolver deposit remains undrawn as well.

Switching to 2008 outlook, Dave already mentioned the factors causing us to revise ad sales guidance. As a result, we now expect net revenue to be at least $2.6 billion at the low end of our previous range. Nevertheless, we're holding our EBITDA guidance of $1.35 billion to $1.4 billion. This excludes the impacts of FAS 123R and Business.com restricted stock expense as before. It also excludes anticipated restructuring charges, which could total $40 million this year.

Expected annual savings in 2009 and beyond should be substantially larger than the one-time costs. As we refine our estimates and begin to achieve these benefits, we'll provide further updates. Excluding restructuring costs, we now expect free cash flow in the range $475 million to $525 million, primarily due to higher cash interest payments following the refinancings. For the full-year, we now expect approximately $745 million of cash interest payments, $65 million of CapEx and $65 million of working capital uses. Year-end net debt should come in at the low end of our previous range or approximately $9.5 billion. And diluted shares should remain around $70 million.

To wrap up, we remain focused on three key financial priorities for the rest of the year. One, controlling our cost structure, two, investing in critical growth initiatives, and three, delevering our balance sheet. That concludes our prepared remarks. Operator, we're now ready for questions.

Question and Answer

Operator

Thank you, sir. At this time we would like to begin the question and answer session of the conference. [Operator Instructions]. Our first question comes from Mr. Peter Salkowski with Goldman Sachs. Sir, you may ask your question.

Peter Salkowski - Goldman, Sachs & Co.

Yes, good morning everybody. I was wondering, if you could start Dave, and talk a little bit about the online platform, how things are progressing there, I know had expected sort of a pay-for-performance sort of platform up by the end of this year rolling into '09, just kind of wondering the status of that?

David C. Swanson - Chairman and Chief Executive Officer

Yes, Pete good morning. It's going along well. If you'll remember, when we did the acquisition of Business.com, one of the things that we talked about is, we were looking at where we were trying to get to that we could accelerate these platform initiatives from about a three year runway to 1.5 years. And it's tracking really, really well. They are on track, everything that we've been looking to develop is either on time or slightly ahead of schedule, and couldn't be happier with the work that those folks are doing.

Peter Salkowski - Goldman, Sachs & Co.

Is DexKnows.com pretty much rolled across all your different markets?

David C. Swanson - Chairman and Chief Executive Officer

Yes, we have... DexKnows.com is the site... the search site that we're using across all markets now.

Peter Salkowski - Goldman, Sachs & Co.

Okay. Could you give us a sense of how big is, either did or is doing, I guess, July is almost over, so the books should be out, how big is that trend, I know things are extremely weak in the market again?

David C. Swanson - Chairman and Chief Executive Officer

Yes, we don't give results on specific products or markets, but as I told, Joe, it's last quarter... things are bad in Vegas, it may continue to be bad, and we are not seeing... they're not getting worse, that's the good news. But they remain pretty tough there and we haven't seen any kind of turn there yet.

Peter Salkowski - Goldman, Sachs & Co.

Excellent, David. And then, Steve, just a couple of quick questions. First of all, on the repurchase of debt, are you guys able to, if you want, to go out and buy debt on the open market?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Yes.

Peter Salkowski - Goldman, Sachs & Co.

So, there are no restrictions there?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

No special restrictions, I mean, we got to comply with all of our restricted payments structures, but no special restrictions.

Peter Salkowski - Goldman, Sachs & Co.

Okay. And then on the restructuring, I guess, the $49 charge you expect to take, it looks like you take a little bit in this quarter. And then, the... either expectations that should the market continue to deteriorate with regard to just the economy being very, very weak, how much run room you guys have if needed to do more?

David C. Swanson - Chairman and Chief Executive Officer

Well, we think that the initiatives that we got are balance in their approach and we're going to get after the efficiencies that are necessary to protect our EBITDA. I'll just kind of highlight for you that the acquisitions that we've done, I think we've done a good job historically of the integration process and sort of extracting synergies, I think that what we're discovering is, there is quite a bit left that we can get to in that regard.

Peter Salkowski - Goldman, Sachs & Co.

Okay. So this is... primarily systems and such not necessarily a headcount or do you expect difficulties [ph] in headcount as well?

David C. Swanson - Chairman and Chief Executive Officer

I think it's... everything is on the table.

Peter Salkowski - Goldman, Sachs & Co.

Okay, all right, I will jump back in the queue and come back if maybe...

David C. Swanson - Chairman and Chief Executive Officer

Thanks Peter.

Operator

The next question comes from Mr. Matt Chesler with Deutsche Bank. You may ask your question.

Matt Chesler - Deutsche Bank

Good morning. I think earlier you had indicated that you're looking to take out $30 million of cost. It looks like you're thinking of expanding your expectations from what you can accomplish in terms of cost savings during this period of downturn. Can you just give us an update on what's your... how much savings your '08 plans include?

David C. Swanson - Chairman and Chief Executive Officer

Hey Matt.

Matt Chesler - Deutsche Bank

Hi, good morning.

David C. Swanson - Chairman and Chief Executive Officer

It's really, the update is well on track on the $30 million of savings. That was really kind of our quick hits list that we identified earlier this year. We are kind of going broader than that which is really why we're anticipating this restructuring charge that we mentioned in our press release and our call.

Matt Chesler - Deutsche Bank

Okay, in terms of the headcount reductions, to what extent will... would those reductions extend into the sales force and if they do go into the sales force, are you evaluating soft of a fewer feat on the street or you think that it's more of a mid-level management issue to more efficiently manage sales forces, is this probably the places that you have been targeting. Just in general, our... with this earning attached to some of the initiatives you're looking at, I know that you guys have closed down the Lincoln, Nebraska directory, maybe that was a special case because there was an independent book, but are you evaluating exiting from other markets or have you fully restricted that from a regulatory stand point?

David C. Swanson - Chairman and Chief Executive Officer

Yes, good morning Matt, it’s Dave. Couple of things. I'll start with the Lincoln, Nebraska, I think there is another University in Nebraska, these college directories that Dex have done, that we exited… they make no money. It was growth initiative in the past that didn't pad out, but we don't really have any other things like that out there, so that's the extent of that. Regarding headcount reductions and might they apply to sales, that is something that we are looking at and it is likely that we will be operating with fewer salespeople for several reasons. But, we have... the way that we are approaching this is we have employee led teams, this is in a top down management, Dave, [inaudible] the table, it's… we have employee led groups that are trying to find ways for us to be as sufficient as possible. And we've done a lot on the technology side that takes a lot of what used to be administrator, we are working to get that out of the salespersons' daily routine, which is opening up a lot of free time for us.

We're also having to find... we're trying to find ways to be just simply more efficient in how we rout sales people, premise sales people out in the field for two reasons. One it makes us more efficient, we need less people to come in the same territory, and it also benefits to our sales people, They don't have to… with fuel prices the way that they are, we don't have to spend... they don't have to spend this much money on fuel driving from one end of the city to the other. So, we're looking at everything. We will size the sales force based on what the workload is, but we see no... we are anticipating any kind of ad sales negative impact as a result of those initiatives.

Matt Chesler - Deutsche Bank

Right, one follow-up question for Steve. I think, Steve in your prepared remarks, you indicated that in the second quarter that there were some expenses that were not incurred, that would be incurred in 3Q that weren't incurred in Q2. Is there a way to size that for us, [inaudible]?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Yes, well the $19 million sequentially included $5 million benefit from capitalized software that actually showed up in CapEx instead of expenses, and it relates to the final stages of those testing associated with our operating systems that went live in July. Apart from that, there is $1 million here, a $1 million there, it's not the big numbers, but they add up to I don't know just probably $4 million or $5 million or something like that.

Matt Chesler - Deutsche Bank

That's it for me, thank you.

David C. Swanson - Chairman and Chief Executive Officer

Thanks, Matt.

Operator

The next question comes from Jaime Neuman with Wachovia. You may ask your question.

Jaime Neuman - Wachovia

Hi, good morning. I was just wondering if you could comment on how Business.com is tracking versus your expectations on their operations. And then has the economy had an impact on the online side of your business and how would that compare to the impact it has had on print?

David C. Swanson - Chairman and Chief Executive Officer

Hi Jaime, good morning. BDC is on track. I would say there is some impact from the economy that they're feeling, but we're still overcoming that with respect to our efficiencies there. So take the... the take up is BDC is on track. As far as the economy’s impact, Jaime, I've… just online in general still growing strong, but also slightly muted. Again what we've seen is as a result of less money to spend. That means that advertisers are buying less of everything, not just one thing or the other.

Jaime Neuman - Wachovia

Right. Can you quantify the growth rate of Business.com in the quarter?

David C. Swanson - Chairman and Chief Executive Officer

We're not breaking that out Jaime, you can… you can try to reverse engineer it if you go through the schedules to the press release because we adjust the revenue for last year, the ad sales for last year to show you what they did last year so you can… you can kind of tabulate than operating that out separately.

Jaime Neuman - Wachovia

Okay. And then on bad debt expense, do you expect to see the same sort of level for the back half of the year, where you... what you saw in the second quarter?

David C. Swanson - Chairman and Chief Executive Officer

We do, yes. Look at this... it's not a typical in a economic environment like we have for bad debt to go from sort of typically I mean, we were running around 3%, now we are running around 5%. And I think that's the kind of the range that we would expect and it does look like it's going to continue with that 5% range for the rest of the year.

Jaime Neuman - Wachovia

Okay. And is there any update on cash, what you expect for cash and just expense for the year?

David C. Swanson - Chairman and Chief Executive Officer

What we've confirmed, we updated our guidance for $745 million, and I think if you back out the first half, the implication for the second half is $367 million I think it is, $378 million in the first half and $367 million in the second half.

Jaime Neuman - Wachovia

Okay.

David C. Swanson - Chairman and Chief Executive Officer

The $378 million in the first half includes $16 million of cash interest payments that we made in June on the RHD Corp. Notes that were exchange for the new Inc. notes. And so those are payments that would have been made in the July. So H1 interest payments was slightly higher than they would have otherwise been. And in the back half of the year will be absent those payments as well as benefit from lower average debt outstanding.

Jaime Neuman - Wachovia

Okay. Okay, thank you very much.

David C. Swanson - Chairman and Chief Executive Officer

Thank you.

Operator

The next question comes from Michael Meltz with JPMorgan. You may ask your question.

Michael Meltz - JP Morgan

Great. Thank you Steve. On that point, the question on the interest expense is the $367 million in the second half, what other factors should we be considering as we look to '09. I know there is the Dex... whatever the piece that adds $65 million, what else is there that will roll into interest expense?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Well, we're really not providing '09 guidance at this point but not that you mentioned it. Let me just, for everyone else's benefit, I clarify so, Dex Media Inc. had issued before the acquisition, it issued two tranches of effectively zero-coupon notes at 9%. They were 9% but they were pick, and those stop picking in November, 2008, and they go to cash pay. The first cash interest payment on that won’t be until May of 2009, and that will be, I think it's $67 million, it's 9% on $750 million. So, that's really the only impact, Michael that I can think of.

Michael Meltz - JP Morgan

Okay. The working capital drag this year, you said $65 million, which I understand is a big number, and more than we'd hope in a normal year. Going forward... how are you thinking about working capital going forward? I mean, should we expect that number to continue to rise or will it decline with revenue declines, I mean, what's the run rate?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Great question, Michael. Normally, when you see in declining sales environment that allows you to release accounts receivable, right. But what’s happening here is, that the economy is having an impact on our advertisers, and as a result we're seeing DSOs went up I think from 28 days a year ago to 35 days in the most recent quarter. And so we're seeing that as part of the reason is the economy. The other thing that's happening in the recent several quarters is, as I mentioned, we just migrated a large part of the advertisers in the press [ph] markets of the phone bill to billing them directly. And while that's going to reduce our operating costs, the phone company was paying us within a week after we send out the bills and advertises, as I say, they tend not to pay within a week. It's... the average is, let's say, 35 days right now. So, that's just kind of adding to that appearance of a greater working capital investment, but that's a one-time impact.

Michael Meltz - JP Morgan

Correct. And Dave, quick question, you had mentioned some of the impact from cancellations, and is there anything you can tell us about metrics through the half year in terms of renewal rates, rough ranges as to where you are versus historically, just so we can get a better sense of that?

David C. Swanson - Chairman and Chief Executive Officer

Yes Michael, I don't actually have it broken out half year, but I can give you generally where it is. Let's say, renewal rates are down 3% to 4% from what we would historically see... what we would have been seeing last year even in a flattish growth environment.

Michael Meltz - JP Morgan

Which [inaudible].

David C. Swanson - Chairman and Chief Executive Officer

Michael, I don't have that right in front of me, I have to get back to you on that.

Michael Meltz - JP Morgan

I just mean ballpark, so you're talking going from 90%... something 300 basis points to 400 basis points lower or is there a different math I should be thinking about?

David C. Swanson - Chairman and Chief Executive Officer

Well, in recurring revenue, which I can kind of give you a little closer ballpark figure of the top of my head, which includes advertiser renewals and increases from existing advertisers, we would have made in the 91%, 92% range, we're now in the more of the 87% range.

Michael Meltz - JP Morgan

Okay. Thank you, Dave.

David C. Swanson - Chairman and Chief Executive Officer

Okay.

Operator

Our next question comes from Todd Morgan with Oppenheimer. You may ask your question.

Todd Morgan - Oppenheimer

Good morning, thank you. I got two questions. First of all, the cost number came in below last year, and I know you've been working on it. I don't know if you can talk any further about perhaps the components production flowing to support areas where you are able to realize those savings? And I guess secondly, if you also, I think mentioned that you completed rolling out the Amdocs publishing system, can you talk about the real opportunity that that may present, does that give you a greater flexibility [inaudible] books or otherwise kind of try and optimize the revenues you're getting from that. Thank you.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Why don’t I start with the cost update and then... as far as the expenses versus last year what we're seeing is lower cost in their selling operations as well as lower cost in our print, paper and distribution activities kind of what we call manufacturing. And it's really just focusing on the activities that are adding value and eliminating those that are the doubt.

Todd Morgan - Oppenheimer

So, it's really, just I think, just really kind of a good blocking and tackling?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Todd, some of the benefits on the Amdocs system. First, it's just having your entire enterprise coming out of one enterprise system, gives us a lot of efficiencies, and it counts advertisers the same way and things like that. So from a management information standpoint, there's a lot of benefits. The overall operating cost to operate the new system in the new environment are lower than they were. So there is cost savings. There are... we have developed sales force automation technologies that... within this system that makes the sales person's job much easier and create a great deal of efficiency for us there. In terms of ability of rescope books, I don't know that that's a benefit, I don't think that really changed.

Todd Morgan - Oppenheimer

Okay, that's helpful. Thank you.

Operator

The next question comes from Ken Silver with Royal Bank of Scotland. You may ask your question.

Ken Silver - Royal Bank of Scotland

Hi, just a follow-up on what you said earlier about the effect of Business.com on ad sales, that supplemental schedule shows $14.2 million of ad sales in the June quarter from a year ago, is that really in that range or is in six months?

David C. Swanson - Chairman and Chief Executive Officer

No, that's right. So it was $14.2 million last year.

Ken Silver - Royal Bank of Scotland

And is that revenue on a GAAP basis if I wanted to adjust the revenue impact?

David C. Swanson - Chairman and Chief Executive Officer

Yes, that's true, both the Business.com revenue and ad sales are the same. It’s actually, I am glad you asked the question Ken, because one of the thing that we are seeing is that, the traditional definition of ad sales that we've used historically is not as reliable indicator as it used to be when it was only [inaudible] digital sales are deferred and amortized. So, some distortion that we never used to see.

Ken Silver - Royal Bank of Scotland

Okay. And have you quantified what the EBITDA contribution was a year ago from Business.com?

David C. Swanson - Chairman and Chief Executive Officer

We have that number but we're not disclosing that.

Ken Silver - Royal Bank of Scotland

Okay, all right. And then, I know you also don’t disclose online revenues as separate from print, but can you maybe tell us whether online revenues were up in the second quarter?

David C. Swanson - Chairman and Chief Executive Officer

Yes, Ken, they were up significantly.

Ken Silver - Royal Bank of Scotland

Can you tell how much?

David C. Swanson - Chairman and Chief Executive Officer

You know we don't... I just have a philosophical problem with that the way I look at this.

Ken Silver - Royal Bank of Scotland

Okay. I just though you didn't disclose the actual number but you don't want to disclose even what the percentage was?

David C. Swanson - Chairman and Chief Executive Officer

No.

Ken Silver - Royal Bank of Scotland

Okay. Okay. That's great, thank you.

David C. Swanson - Chairman and Chief Executive Officer

Thanks Ken.

Operator

The last question comes from Mr. Steve Flynn with Morgan Stanley. You may ask your question.

Steve Flynn - Morgan Stanley

Good morning, two questions. I just wanted to be clear as far as the cost benefits in the quarter, I think you said that was $9 million including the $5 million for the capitalized offer, is that correct?

Steven M. Blondy - Executive Vice President and Chief Financial Officer

Well, $19 million lower cost Q2 '08 versus Q1 '08.

Steve Flynn - Morgan Stanley

Okay, and that includes all like the restructuring, stock comp etcetera.

Steven M. Blondy - Executive Vice President and Chief Financial Officer

That is excluding stock comp, but it does include the restructuring costs that we did bare, I think it was $4.6 million of expenses in Q2.

Steve Flynn - Morgan Stanley

Okay. And then the second, can you talk a little bit about ... talk a little bit about savings in print paper and distribution cost, but can you talk a little bit about the rising costs for newsprint and how it’s affecting you guys? And I think you have a couple of print contracts that fall off of the end of this year, is that going to impact your printing costs for '09, is that a big issue?

David C. Swanson - Chairman and Chief Executive Officer

I'm sorry, I didn't really understand the way you asked the question, Steve. Could you clarify?

Steve Flynn - Morgan Stanley

Yes, could you just talk about trends in print cost and paper and distribution costs? Where your contracts are now? Is there any... when these contracts roll off with your suppliers, are they constantly mark-to-market or will that change your cost going forward?

David C. Swanson - Chairman and Chief Executive Officer

So, our print contracts are long-term contracts that go through 2012, 2013, etcetera. So that's not going to really impact… certainly impacted by sort of year-to-year changes. We do have more exposure I guess, to paper prices on the annual basis, I mean you have long-term paper contracts but they are not quite that long. But remember, paper is still I think it's only, I don't know if it is 5% or 6% of our costs. So it's really not that noticeable across the overall expense base.

Steve Flynn - Morgan Stanley

Okay, great. Thank you.

David C. Swanson - Chairman and Chief Executive Officer

All right, and so to wrap up, we remain focused here at RHD on three top priorities for the rest of 2008. First, debt reduction and the additional opportunities to reduce near-term mandatory debt repayments and enhance our operating flexibility. Second, careful management of our cost structure and continued improvement in the efficiency and effectiveness of our organization. And third, investments in training products and initiatives that will help us drive sustainable long-term growth. I want to thank you all for your continued interest in R.H. Donnelly today. Have a good day.

Operator

This concludes today's conference. Thank you for your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: R.H. Donnelley Corp. Q2 2008 Earnings Call
This Transcript
All Transcripts